Obama 2.0 and the world: Andy Xie

Commentary: U.S. president’s vaunted Asia pivot will be mostly talk

By

AndyXie

BEIJING (Caixin Online) — Obama won reelection despite a high unemployment rate, declining average incomes and skyrocketing government debt because voters blamed his predecessor for the economic problems and didn’t trust his opponent, Mitt Romney.

Even though the economy has improved somewhat in the past three years, the United States’ situation remains dire: the poverty rate is at a historic high of 15%; middle class income is back to the 1995 level and wealth to 1983; the unemployed who find jobs end up with significantly lower pay than at their prior employment; and the combined local and federal government deficit at 9.5% of gross domestic product and debt stock at 120% of GDP.

The Republican Party put up a strange candidate to run against Obama. Romney is a former private equity person. So soon after a financial crisis caused by people like him, it seemed an odd choice, even though he was not one of the crooks responsible.

His background just didn’t pass the smell test. The contest was so close towards the end because Obama screwed up in the first debate.

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The role of the government was the issue during the contest. The Republicans campaigned on shrinking the government, the Democrats on a caring government. The election result, however, didn’t give a clear verdict on the issue.

On the surface, the election kept the status quo: the Democrats kept the White House and Senate, the Republicans the House. The undercurrents suggest a country much more divided than before.

Romney won the traditional Republican states that are poorer than the national average and are net beneficiaries of Federal tax dollars. Voting for a smaller government is hardly in their best interest. Also, he won among the older population who are more dependent on Medicare and Social Security. Voting for a smaller government is hardly in their interest, either.

This election was more about race than anything else. Romney won 70% of the white vote. Obama won over 90% of the black vote and over 70% of the Hispanic and Asian vote.

The United States is amidst a profound transition towards a multi-ethnic and multi-religious society. In its first two centuries, the country absorbed mostly Europeans. Hispanics and Asians are now the fastest growing groups in the country. The Roman Empire first gave citizenship to other Italians and eventually to the people within the empire. What’s going on in the United States is similar to the second stage of Roman integration. The future of the United States depends on whether the existing majority accepts this change and whether the newcomers are additive to the system, not subtractive. The answer to both remains uncertain.

The tilt of the Asian vote toward Obama demonstrates the importance of race in this election. In 1992, Bill Clinton won only 31% of the Asian vote. Asian-Americans have relatively high incomes and are least dependent on government help. They should be a natural constituency of small government Republicans. That they are not shows that the raison d’être of Republican Party is not economics anymore.

The party is a coalition of business interests who want low taxes and fewer regulations and evangelical Christian voters. The latter block delivered all states Romney won. It shows what’s important in the Republican Party.

As demography tilts further toward the Obama coalition, the Republican Party can compete by becoming more like the Democrats or shift to extremist tactics. I’m afraid the latter is more likely.

A conservative democracy

The American democratic system is designed to slow, but not prevent change.

In the 2012, general election, the Democrats actually won more votes than the Republicans in the elections for the House. But the Republicans retain a comfortable majority there. The reason is that the seats are contested one at a time within a district. The majority party at the state level can redraw the district to make the election more favorable to it.

In theory, 26% of the voters could elect a majority in the congress or a president. Of course, it is statistically difficult. But, the system gives incumbents an advantage to overcome a majority. It prevents a temporary and irrational flare up in popular sentiment to change the political system and damage the country. If the popular sentiment is lasting, the system eventually conforms to the will of the people.

In addition to the checks and balances among the different branches of the elected government, an independent and appointed judiciary makes radical changes even more difficult.

A government that adopts change hastily could be struck down by a single judge. Even though the judiciary can sometimes spearhead change, like in abortion rights, it is by and large the most conservative branch of the government. Checks and balances and slowing but not resisting change are the secrets for the longevity of the United States’ democratic system.

The Athenian democracy in the fifth century B.C. destroyed itself by allowing public anger to decimate its best and brightest. The Roman republic fell to first mob rule and then military dictatorship because the system concentrated too much power among vested interests that refused to address popular grievances.

The Weimar Republic gave way to Adolph Hitler’s dictatorship because the system allowed total power handover to a party that won the most votes — not even the majority — and that power was not checked against by other branches of the government.

In two centuries, the United States abolished slavery and gave blacks, and eventually women, the right to vote. Now it is beginning the process of giving gays and lesbians the right to marry. Big problems in U.S. history have all taken a long time to resolve, but they do get resolved. The delay prolongs the pain for the affected, but avoids hasty and destructive change.

The United States is amidst a profound transition towards a multiethnic and multi-religious society. In its first two centuries, the country absorbed mostly Europeans. Hispanics and Asians are now the fastest growing groups in the country. The Roman Empire first gave citizenship to other Italians and eventually to the people within the empire.

What’s going on in the United States is similar to the second stage of Roman integration. The future of the United States depends on whether the existing majority accepts this change and whether the newcomers are additive to the system, not subtractive. The answer to both remains uncertain.

The fiscal cliff

When raising the debt limit for the Federal government a few months ago, the two parties couldn’t agree on how to address the deficit issue and just adopted conditions for another round of negotiations at the end of 2012. The conditions are that, if the two sides fail to agree, the Bush tax cuts, Obama’s payroll tax cuts and other assistance programs, and some across-the-board spending cuts would automatically go into effect in 2013.

The total amount involved is 3.5% of GDP. The government and market analysts believe that this contraction of the Federal budget would cause another recession and increase unemployment above 9% by the end of 2013.

Obama ‘s line in the sand is that the households with income above $250,000 and individuals making above $200,000 would see their top tax rate climb back to the Clinton-era 39.5% from the 35% they received under George W. Bush. Obama emphasized his position during the presidential campaigns and earned the right to hold this line.

The Republicans, especially the “tea party” members, have sworn against any increase in the marginal tax rate. The election result has weakened the Republicans’ hand. Its leadership sounds conciliatory in negotiations. But it is not clear that the “tea party” members in the Congress will compromise this time.

The market has become optimistic about the conciliatory rhetoric from both sides and recovered some of its losses since the election. The optimism may prove premature.

The Republicans, especially the “tea party” members, have sworn against any increase in the marginal tax rate. The election result has weakened the Republicans’ hand. Its leadership sounds conciliatory in negotiations. But it is not clear that the “tea party” members in the Congress will compromise this time. The market has become optimistic about the conciliatory rhetoric from both sides and recovered some of its losses since the election. The optimism may prove premature.

The Republican Party won’t surrender on the tax issue. Even though the Obama administration has stated that it is prepared to go over the cliff, it really doesn’t want this. The party that occupies the White House is always blamed for a recession. Hence, it is likely to seek a compromise.

The solution that the market expects and wants is a grand bargain between the two parties to sort out expenditure and revenue for the next decade. This is unlikely. I think that the two parties would agree to a temporary measure to get through 2013, involving some temporary tax increase on the rich and spending cuts.

Going over the cliff is good for the United States in the long run. Even though it would cause a recession in the short term, it would roughly halve the Federal deficit. It is at least a major step towards fiscal sustainability. But, as the baby boomers retire, government expenditures on health care and social security will escalate. Going over the cliff merely postpones the debt crisis.

U.S. fiscal sustainability requires both controlling expenditure and raising revenue. On the expenditure side, some increase in the retirement age may be inevitable. Also, means testing for social security, i.e., reducing benefits for well-to-do seniors, is also needed. Most important, there must be control over the escalation of health care costs.

A McKinsey study shows that higher doctor and hospital charges explain half of the U.S.’ health care costs, which are twice as high as in other developed economies. Unless the government does something about it, the escalating health care costs will bankrupt the U.S. government.

Even with maximum possible expenditure cuts, the United States’ local and Federal governments can’t cut expenditures significantly below the current 35% of GDP. For an aging society, it is hard to see how this could be done. Hence, the Republican intransigence against raising taxes is not realistic. Unless it compromises, a debt crisis is a matter of time.

The grand bargain is not coming anytime soon. The U.S. government will likely have more temporary measures to keep the budget going. The uncertainty will linger until next crisis.

The rise of protectionism

The second Obama term will be significantly more protectionist than the first. Without the auto industry bailout in 2009, the Midwest swing states may not have voted for him and there would be no second term. In a divided electorate, micro-targeting is highly effective in determining an election outcome. Learning from this lesson, the Obama administration is unlikely to do anything harmful to the manufacturing interests in the Midwest.

As part of its pivot to Asia, the United States is trying to expand the Trans-Pacific Strategic Economic Partnership Agreement (TPP). The existing members are the United States, Chile, Singapore and New Zealand. Australia, Peru, Vietnam, Malaysia, Mexico and Canada are negotiating to join.

The TPP has been touted as a block to offset China’s weight in Asian trade. I suspect that the United States’ internal constraints will prevent it from taking off in a significant way. For example, having Vietnam as a member has much bigger implications than having Singapore or Chile.

Indeed, the United States will use most anti-dumping measures to restrict imports that compete against America’s domestic industries. Anything related to the auto industry is off the limits. That’s why the United States is complaining to the WTO about Chinese auto parts. It is also imposing protectionist measures against Chinese solar power equipment.

The protectionist bent of the second Obama term will have a significant effect on export-oriented East Asia. Even though most measures will be against Chinese exports, other countries, like Japan and South Korea, provide equipment and components for such products.

All countries will be affected. As the United States backs down from free trade, others may follow. The era of trade-led global economy is over. In the past two decades, global trade has risen twice as fast as GDP. A one-to-one relationship is more likely in the future.

The pivot to Asia

After being bogged down in Iraq and Afghanistan for a decade, the Obama administration has been talking about pivoting to Asia in foreign policy. The actual content so far includes the deployment of a few dozens of marines to Australia, some extra warplanes to Okinawa and a few navy ships parked at Guam. The U.S. government talks about much more to come.

I seriously doubt that the Asian pivot will have enough substance behind it.

The United States’ fiscal situation makes significant cuts to the defense budget inevitable. Its defense budget accounts for 45% of the global total, while its economy is about 23% of the world’s total. The United States cannot spend twice as much on defense with such a large fiscal deficit. The inevitable cutting will make the Asian pivot difficult.

Regardless of what the U.S. government says, its foreign policy is inevitably pulled into the Middle East. It’s been so for the past half century. The current decade is unlikely to be different. Something always happens in the Middle East to suck the United States in. The Asian pivot will remain mostly talk.

The talk has been quite effective so far. It has sown tension between China and its neighbors. The American effort mostly involves Secretary of State Hillary Rodham Clinton visiting the region repeatedly. She is literally one woman army.

As long as China keeps its cool in dealing with its neighbors, the tension won’t turn hot. And I doubt that Clinton’s successor will be as effective.

U.S. president tends to focus on foreign policy when it is difficult to achieve anything domestically. Obama is in such a situation.

When a weak successor to Clinton is found, it will give him the opportunity to get involved more. Asia will be his preferred destination. Unfortunately, regardless of his intention, he will be sucked into the Middle East.

The odds are that, like his predecessors, he will try to broker a peace deal between the Israelis and Palestinians at some point and without success.

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